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Preventing Wrongful Termination in Small Businesses: Key Causes and Mitigation Strategies

Preventing Wrongful Termination in Small Businesses: Key Causes and Mitigation Strategies

Wrongful termination claims can have serious repercussions for small businesses, both financially and in terms of reputation. Without the guidance of an internal HR person or a fractional external HR advisor, it’s crucial for small business owners to be aware of the common causes of wrongful termination and take proactive steps to mitigate these issues. In this article, we’ll explore the primary causes of wrongful termination and provide practical strategies to help small businesses avoid these pitfalls.

1. Inconsistent or Poor Documentation:

One of the leading causes of wrongful termination claims is a lack of proper documentation. Without clear and consistent records of performance issues, disciplinary actions, and communication with employees, small businesses leave themselves vulnerable to claims of unfair treatment. To mitigate this issue, small businesses should establish a system for documenting employee performance, including written warnings, performance evaluations, and any instances of misconduct. Consistent and thorough documentation can serve as evidence in the event of a wrongful termination claim.

2. Violations of Employment Laws:

Failure to comply with employment laws is another common cause of wrongful termination claims. Small businesses should familiarize themselves with applicable local, state, and federal laws, including anti-discrimination, wage and hour, and family leave regulations. Regularly review and update policies and procedures to ensure compliance. Additionally, consider consulting with legal professionals or utilizing online resources to stay informed about changes in employment laws and best practices.

3. Inadequate Investigation and Documentation of Misconduct:

When terminating an employee for misconduct, it’s crucial to conduct a thorough investigation and document the findings. Rushing to judgment or basing terminations on hearsay can lead to wrongful termination claims. Small businesses should establish a clear process for investigating allegations of misconduct, including gathering evidence, interviewing relevant parties, and documenting the steps taken. By conducting a fair and objective investigation, small businesses can demonstrate that terminations were based on valid reasons.

4. Lack of Clear Policies and Procedures:

Failure to establish and communicate clear policies and procedures can create confusion and increase the risk of wrongful termination claims. Small businesses should develop an employee handbook or a set of written policies that outline expectations, disciplinary procedures, and complaint resolution processes. Regularly communicate these policies to employees and ensure they have access to the information. Transparent and well-communicated policies can help prevent misunderstandings and provide a framework for fair and consistent decision-making.

5. Seek External HR Support:

In the absence of internal or fractional HR expertise, small businesses can still seek external support on an as-needed basis. Consulting with HR professionals or legal counsel can provide valuable guidance in navigating complex HR matters, including terminations. They can help review documentation, provide advice on compliance, and offer insights on best practices. Utilizing external support ensures that small businesses have access to expert advice without the long-term commitment of a dedicated HR resource.


Preventing wrongful termination claims requires proactive measures and a commitment to fair and compliant employment practices. Small businesses without internal or fractional HR support can still mitigate these issues by implementing strategies such as consistent and thorough documentation, compliance with employment laws, proper investigation and documentation of misconduct, clear policies and procedures, and seeking external HR support when needed. By prioritizing fair and transparent employment practices, small businesses can reduce the risk of wrongful termination claims and foster a positive work environment for their employees.

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